What it means
Television and radio companies earn most of their money by selling advertising. Advertisers pay for the chance to reach audiences, so a station with a large audience should earn a large share of the market's revenue.
The power ratio tests whether that really happens. The ratio is a way of fairly comparing stations of different sizes.
A station with 10% of viewers that earns 10% of local advertising revenue has a ratio of 1.0. If it earns 13% of the revenue, it has a ratio above 1.0, which suggests that it is selling its audience at a premium, perhaps because it reaches valued groups of viewers.
Several things can push the ratio up or down. The make-up of the audience matters, since advertisers pay more for viewers who spend more.
So do the strength of the sales team, the pricing policy, the mix of local and national advertising and the time of day when the audience watches. Analysts and station owners use the ratio to find where there is room to improve.
A low figure with a healthy audience suggests the sales team is underpricing or the audience is of low commercial value. A high figure might show strong sales but also suggest that the audience could be at risk if advertisers are being priced too high.
Like any ratio, it should be used with care. It depends on how audience share and market revenue are measured, it can swing from year to year with political advertising or big sporting events, and it ignores costs.
It is a starting point for questions, not a verdict on profit.
In practice
Real-world examples.
Example
A local radio group has 25% of listeners but earns only 18% of advertising revenue in its city. Its power ratio of 0.72 prompts the managers to retrain the sales team and review rates. A year later the ratio has risen to 0.85.
Example
A television network owner compares ten stations it owns. The station with the highest ratio sells a premium morning news programme, and the others adopt its pricing approach. Over the next year the group's average ratio rises from 0.9 to 1.0.
Example
An investor evaluating a broadcaster to buy notices that its ratio has stayed above 1.2 for five years. She concludes that the company has pricing strength, but checks whether it depends on one large advertiser. She also reviews how much of the revenue came from one-off events.
Formula
Calculation
Power ratio = Revenue share / Audience share
Revenue share = Company revenue / Total market revenue
A television station earns $40,000,000 in a market where total broadcast advertising revenue is $300,000,000, and it attracts 10% of the audience.
Revenue share = $40,000,000 / $300,000,000 = 0.1333, or about 13.3%.
Power ratio = 13.3% / 10% = 1.33. The station earns about a third more revenue than its audience share alone would suggest, because the expected revenue at a 10% share would be $300,000,000 x 0.10 = $30,000,000 and its actual revenue is $10,000,000 higher.Case study
Seen in the real world.
Coastline Broadcasting is a fictional group with two radio stations in the same city. Station A had 20% of the audience and 20% of the revenue, while Station B had 15% of the audience and only 9% of the revenue.
Station B's power ratio was therefore 0.60. In this illustrative case, an audit found that the station sold most of its time at a discount to a few agencies, and after the group created a rate card and trained its sales team, the ratio rose to 0.85 within two years, adding about $1,800,000 a year to revenue in a market worth $48,000,000 in advertising. The group director noted that the audience figure had not moved, so all of the gain came from better pricing and selling. She asked the other stations to run the same analysis each year.
Watch out
Common mistakes.
- Reading a high ratio as proof of high profit, when costs are not part of the calculation.
- Comparing ratios from different markets or different measurement systems.
- Ignoring one-off events such as elections and sports finals that distort a single year's revenue.
Questions
People also ask.
What is a good power ratio?
A figure around or above 1.0 is usually seen as healthy, but the right level depends on the market and the type of audience.
Why might a station with a big audience have a low ratio?
Because the audience may be less attractive to advertisers, the sales team may be underpricing, or the station may rely on cheap, low-priced airtime.
Can the ratio be used outside broadcasting?
The idea of comparing revenue share with market share is used in other industries, but the name is mainly used in broadcast media. Always check how the market and the audience are defined before comparing two figures.
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